Do You Know When To Buy?

investing_questions.jpg

Everyone has heard the phrase “buy low and sell high”. But how do you know when a stock is priced low?

In this blog post I show you exactly how to determine if a stock is priced low. But first you'll need to know these two terms: dividend, and dividend yield.  

Dividend

A dividend is a cash payment made to shareholders. For example the current annual dividend for Johnson & Johnson (JNJ) is $2.44. So if you own 100 shares in JNJ you will receive $244 each year for as long as you own those shares, and as long as JNJ continues to pay out a dividend. The dividend is yours to keep; you can spend the money or re-invest it if you wish!  

Dividend Yield

The dividend yield is the annual dividend divided by the current share price:

Dividend Yield = Annual Dividend / Current Share Price

Using JNJ as an example, we can simply calculate the dividend yield:

Dividend Yield = Annual Dividend / Current Share Price

Dividend Yield = $2.44 / $69.86

Dividend Yield = 0.0349 * 100

Dividend Yield = 3.49% 3.49% represents the return on your investment. If you invested $8000 in JNJ you would receive $279 in dividends each year: 3.49% of $8000 = $279  

Yield Goes Up

What happens to the dividend yield when the stock price goes down? Let take a look, suppose JNJ’s stocks price drops to $50, $45, or even $30:

$2.44 / $50 = 4.9%

$2.44 / $45 = 5.4%

$2.44 / $30 = 8.1%

Notice that the when the stock price drops the dividend yield goes up. You want to buy low because the yield will be higher which means a higher return on your investment.  

When is a Stock Low

The best method for determining when a stock is low is to compare the stock’s current dividend yield to its average (10yrs) dividend yield. When its current dividend yield is higher than its average dividend yield the stock is undervalued (priced low) and worth consideration. It shocks me to see investors and fund managers not apply this simple principle and continue to buy stocks when they are priced high, and then they blame the stock market for their portfolio’s poor performance.

Remember there are other things to consider before making a stock purchase. In my course I cover the 12 Rules of Simply Investing, the check for undervalue is just one of the 12 rules, but it the most important one. If a stock is not undervalued you should move on and not spend any more time in valuating it further. Buy quality stocks when they are undervalued and you will become a successful investor.

Did you enjoy reading this article? If so, I encourage you to sign up for my newsletter and have these articles delivered via e-mail once a month…and it’s free!

18 comments

Brett @ wstreetstocks Jan 24, 2013 06:18am

Your method is a great way to tell when a stock is low. Personally I use metrics such as the PEG and P/S ratios to decide when to buy. PEG and P/S ratios obviously don't take dividend yield into consideration, so that is somewhat of a downside.

Read more
Read less

I use this method also. It is a pretty quick and effective way of assessing if something is above or below historical yield and therefore under or overvalued to your point. The one caveat is if there has been a deterioration in either the growth or performance of the business, investors may price the stock on a higher yield if growth prospects are no longer viewed as strongly, so being aware of business changes and possible repricing is important.

Read more
Read less

This is a very concise and important subject. I haven't read this easy way to determine if a stock is low on any blog before. Thank you for that! It definitely makes sense.

Read more
Read less
How to Take the Fear Out of Investing | Simply Investing Apr 3, 2014 04:15am
[…] to know when a stock is undervalued or […]
Read more
Read less
Dividend Mutual Fund Reduces Dividend by 17%. Surprised? | Simply Investing Jun 7, 2014 03:57am
[…] Avoid mutual funds, and buy your own high quality dividend paying stocks when they are undervalued. […]
Read more
Read less
Building a Portfolio is a Marathon not a Sprint | Simply Investing Jul 5, 2014 09:18am
[…] in order to be a successful investor you need to buy quality dividend paying stocks when they are undervalued, and don’t let anyone else tell you […]
Read more
Read less
Tech Bubble, Housing Bubble, IPO Bubble, Stock Bubble? | Simply Investing Aug 24, 2014 07:13am
[…] on acquiring quality stocks when they are undervalued and you will do very well for yourself in the long run. And remember this quote from one of the […]
Read more
Read less
Are You an Anxious, Impatient, Irrational Person? | Simply Investing Nov 1, 2014 06:55am
[…] Remember to be a successful investor: remain calm, patient, and rational and invest in quality dividend paying stocks when they are undervalued. […]
Read more
Read less
Worried About Falling Stock Prices? | Simply Investing Nov 23, 2014 09:36am
[…] key is to buy quality stocks when they are undervalued. The return on your investment (dividend yield) will also be higher when stock prices are low. […]
Read more
Read less
Should You Buy Growth Stocks? | Simply Investing Dec 29, 2014 05:08am
[…] Focus on quality stocks with low P/E ratios, and buy them when they are undervalued. […]
Read more
Read less
Do You Have An Advantage Over Large Institutional Investors? | Simply Investing Feb 22, 2015 07:56am
[…] Therefore stop worrying about what large institutional investors are doing, as a small investor you have the advantage. Focus on buying quality dividend paying stocks when they are undervalued. […]
Read more
Read less
Do You Have An Advantage Over Large Institutional Investors? | Simply Investing Feb 22, 2015 07:59am
[…] small investor you have the advantage. Focus on buying quality dividend paying stocks when they are undervalued and you will do very well for […]
Read more
Read less
One Simple Piece of Investing Advice For You | Simply Investing Mar 15, 2015 11:31am
[…] focus on buying quality dividend paying stocks when they are undervalued and you will do very well for […]
Read more
Read less
Are triple digit returns possible? | Simply Investing May 24, 2015 05:34am
[…] Keep in mind this is not a buy list, you should only buy quality companies when they are undervalued. […]
Read more
Read less
What’s Companies Should You Invest In? | Simply Investing Jun 14, 2015 05:22am
[…] on buying quality business when they are undervalued and you will do very well for […]
Read more
Read less
What’s Your Biggest Fear in Investing? | Simply Investing Jul 18, 2015 06:28am
[…] 1. Will people still be using this company’s product or service in 20 years? 2. Does the company have a history of consistently increasing earnings over the last 10 years (check the earnings per share “EPS” values)? 3. Does the company have a history of consistently increasing dividends over the last 10 years (check the dividend per share values)? 4. Does it have a low P/E ratio? 5. Does the company have low debt (check the Long-term Debt-to-Equity Ratio)? 6. Is the company’s current dividend yield greater than its average dividend yield? […]
Read more
Read less
Stocks Are Going up, Should You Buy? Going Down, Should You Sell? | Simply Investing Oct 25, 2015 08:42am
[…] In the Simply Investing course I teach you how to know when a stock is worth buying (when its undervalued) and when its worth selling (when its overvalued). Focus on these key concepts and avoid the stock […]
Read more
Read less
Picking Winners & Identifying Losers | Seeking Returns Mar 18, 2018 08:38am
[…] remains particularly in the exceptions to various ‘rules’.  Case in point, Simply Investing‘s, “The best method for determining when a stock is low is to compare the stock’s […]
Read more
Read less